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Playing Chinese bond games

The first interest rate cut in five years has helped to boost the Chinese bond market, which is being reformed and currently enjoying a good run. But there are still problems. The market is relatively new and lacks experienced traders. More worryingly, the government closed down the futures market after Wanguo Securities crashed because of a bad speculation. Although China is keen to have foreign investors in the market, it says this won't happen until the reforms are completed ­ which it estimates will take several years. Sophie Röell reports

China's government bond market is booming. In July alone, some Rmb 220 billion ($26.5 billion) worth of bonds changed hands on the Shanghai Stock Exchange ­ bringing the total turnover for the year to Rmb557 billion. In addition, this year there have been some Rmb175.2 billion ($21 billion) in new issues ­ bringing the total value of bonds issued by China's ministry of finance up to Rmb570 billion. Modest by international standards, perhaps, but impressive in a country where only three years ago the government funded most of its deficit by printing money.

The driving force behind the boom has been an interest rate cut by the People's Bank of China (PBOC), the central bank, on May 1 ­ the first in five years. Dai Xianglong, the bank's governor, hinted that if inflation remained under control a further cut would follow later in the year.

Banks and securities houses seem confident that, with China's bond market now growing rapidly in size, the underwriting of and trading in government bond issues will be a profitable line of business in the future. In the process, the system is being reformed from one where bonds were non-tradeable and distributed by administrative placement to one which resembles international practice.

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